Family Security Law Group, APC write about estate planning, wills, trusts, durable power of attorney, title and property agreements, special trusts, probate, trust administration and more!

November 2016

11/17/2016

“Retired Orange County Superior Court Judge Betty Lou Lamoreaux was such a force in juvenile justice that the seven-story family court building bears her name.”

As The Orange County (CA) Register explains in a recent article, “The perils of probate court: Former judge with Alzheimer's could lose her life savings,” Judge Lamoreaux is now in danger of being financially ruined. And this is caused partially by the justice system to which she dedicated her life. Lamoreaux, who is 92, has Alzheimer’s dementia, and her family – primarily her nieces and nephews –is trying to care for her and preserve her estate. Lamoreaux has no children. However, the family has disagreed over how best to do that and about who should be in charge of her money. Consequently, a court battle has ensued.

Remarkably, the Lamoreaux dispute has included three judges and nine lawyers and related professionals, with more attorneys planning to join in the case. Some in the family worry that the probate fight could result in attorney fees gobbling up “Auntie Lou’s” nest egg – forcing her to sell her $1.8 million house in Newport Beach. They argue that the probate court’s rules are the problem.

“The very court system she served, and was honored by, is now bilking her of her life savings,” says Duff McGrath, her 58-year-old nephew and a trustee.

These frustrations are felt by others in probate court, where the affairs of a loved one can be removed from family members and assigned to experts at expensive rates. Each year, about 5,000 probate-guardianship cases slog through probate court in Orange County.

Typically, the work is conducted by qualified and sincere professionals attempting to protect their clients, but the process of turning a person’s affairs over to lawyers and can get expensive, even when fees must be approved by the court.

Until a few years ago, Lamoreaux shared her home with her 87-year-old sister and a niece. As her dementia got worse, the home fell into disrepair, to the point of being unhealthy, according to court records. McGrath and other family members went to probate court in 2015 in an attempt to get a court order that would give them the authority to keep Lamoreaux from those they felt would do her harm. McGrath moved Lamoreaux from her house to a senior living center while her home was undergoing repairs. The court responded by appointing two people to the case, an attorney and a guardian, also an attorney, to represent Lamoreaux. That’s when the real trouble started.

The court appointees, after speaking with Lamoreaux, thought she wanted to move back home with her sister. A judge agreed and ordered McGrath to help her move back home. McGrath has appealed that order and hired his own legal team. They argued that Lamoreaux should stay at the center, which has the expertise and facilities to care for her properly.

As Lamoreaux’s case moved forward, additional professional consultants, a fiduciary, and more lawyers – all charging from $200 to $450 an hour – were added. McGrath said the total, when everybody is working, including his attorneys, adds up to about $3,000 an hour.

Lamoreaux’s fate now is in the hands of a judge, who will decide whether McGrath should be removed from his trustee position. According to court records, Lamoreaux’s doctor said she shouldn’t be moved at this time, and she repeatedly tells friends that she wants to stay at the center. The attorney appointed by the court to represent Lamoreaux asked for an emergency hearing to determine if McGrath should be removed as trustee and replaced with a yet another professional.

While there are some who don’t begin considering retirement until they reach their 50s, it’s not too late to get started on your retirement planning. But a late start may mean you may have to face some unfortunate realities.

Retirement can be overwhelming. Let’s look at those things some forget to plan or didn’t even realize they needed to plan. First, some people aren’t prepared emotionally to retire. You need to determine how you will spend your time and what it might cost.

Medicare. You must enroll in Medicare at 65, but if you delay until 66, you’ll have to take the initiative because it’s not automatic. If you’re late, there’s a 10% penalty for every 12 months you snooze. If you wait 24 months, there’s a 20% permanent penalty because you forgot to re-enroll. Enrollment is three months before to three months after your 65th birthday. If you delay taking Social Security, you’ll have to enroll in Medicare on your own.

Health-Care Costs. Studies show that health care will cost about $250,000 for a couple in retirement, or about $5,000 per year per person. People frequently underestimate health-care costs in retirement—they forget prescription drug and long-term care costs—which can use up a lot of money. The same is true of dental expenses, and Medicare doesn’t cover dental.

Major Purchases and Repairs. Some fail to account for major purchases, such as home repair and upkeep. Many retirees are caught short on the occasional large purchase, so examine your budget annually to be sure you consider things that come up quarterly or semiannually. Remember that life events like weddings, graduations, and spoiling the grandkids can be major unanticipated costs.

Planning for a Long Life. This is very important because if you will live to age 90, will your money last? There are many things to consideration when you think about 25 years in retirement, like long-term care.

Estate Planning. Estate plans aren’t just for the wealthy, and if you’re not pro-active, all those decisions will be made for you by the state. Create a will or trust, be certain that your beneficiaries are correct and up to date, and make sure you have a power of attorney and health-care directive.

“What we often overlook is that a retirement account doesn't have to be blessed by the IRS to be used for retirement.”

Almost every American adult contributes to at least one retirement account that allows them a current income tax deduction or a tax-deferred account contribution (IRA's, 401k's, 403b's, 457b's and defined benefit plans). And as you know, when you start to take distributions from these accounts, you pay income taxes at ordinary income tax rates. Other retirement accounts, like Roth IRAs, don't allow a current deduction, but they’re tax free when you are ready to begin taking distributions at age 59½. A good-size Roth is a wise estate planning move. Since the IRS does not make you take withdrawals from your Roth over your lifetime, you can leave a tax-free "gift" to your heirs if you don’t spend it all during your lifetime.

As Physician’s Money Digest says in “10 Reasons You Need a Taxable Investment Account,” taxable retirement accounts are ignored because we’re so focused on IRS-approved retirement accounts. But you might think about supplementing your savings with a taxable retirement account. This can be a regular, old-school investment portfolio that’s not linked to any government regulations and that you’re building for retirement.

Here are some of the benefits of a taxable retirement account:

You have complete freedom over investments;

You’ve got total flexibility over your account;

You can use your portfolio as collateral for a loan;

You don't have to start withdrawing your taxable account when you turn 70 1/2;

You have "basis" in your account, which means when you withdraw money, you pay taxes only on the growth;

You only pay a maximum tax rate of 20% on long-term capital gains and qualified dividends (from stock held for at least one year);

You can write off capital losses in the account;

You can use income from the account to offset an unused investment interest deduction;

Your heirs will enjoy a stepped-up basis if they inherit the account from you; and

Your heirs don't have to start taking withdrawals from the account when they inherit it from you.

But be aware that taxable accounts aren’t protected in the event of a lawsuit, and you get basis instead of a tax deduction. That should be examined in light of your goals and insurance protection.

This doesn’t mean having a taxable account is your #1 priority when saving for retirement, but it should be up on the list based on your finances and the integration of tax planning with your short- and long-term financial goals. It can be a good filler for some of the gaps in your tax and retirement planning strategy.

Create a will if you don’t have one. A 2015 survey found that 54% of Americans ages 55 to 64 and about 70% of Americans ages 45 to 54 don’t have a will in place. A legally valid will could save your heirs from expensive problems with probate.

Add related documents. Depending on your estate planning needs, you may need a trust, durable financial power of attorney and medical powers of attorney, as well as a living will.

Review beneficiary designations. Check your documents and verify the designated beneficiaries. These take priority over the provisions of wills when it comes to retirement accounts, life insurance, and other non-probate assets.

Make a list of assets and debts. Give your heirs an estate planning organizer so that they can reference it if you pass away. List your real property and personal property assets, as well as real estate you own and its value. Also list personal property items that have a monetary worth. You can also list your bank and brokerage accounts, retirement accounts, other investments and insurance policies. Finally, make a list of your credit card debts, mortgage, home equity line of credit, and any consumer loans.

Consider making gifts to reduce the size of your taxable estate. The lifetime individual federal gift, estate, and generation-skipping tax exclusion amount is unified and is set at $5.45 million for this year. So a married couple can transfer up to $10.9 million tax-free.

Work with an estate planning attorney. Do-it-yourself estate planning is not recommended because there are numerous financial, legal and emotional issues and pitfalls to avoid.

Ok, you’re not a multimillionaire yet. But if you own a business, have a blended family, have a child with special needs, are concerned about dementia or want to pave a smooth road for the loved ones left behind, contact one of our estate planning attorneys at Family Security Law Group to get going now.

But this doesn’t mean you get to ignore how that money will be distributed—there are options available. The insurance company can cut a check, but you can have the insurer hold on to all or some of the funds and distribute them at a later date or in periodic distributions. If the money is held by the insurer, it will continue to earn interest—and that interest is taxable.

Another option is to transfer those funds to a trust that could control the proceeds of the policy based on the stipulations you set when creating it. However, remember that trust planning can get complicated if you establish “incidents of ownership” in the policy, in other words, if you are controlling the policy in some way. For example, such “incidents” include borrowing against it, using it as collateral or assigning it in a contract. If that happens, the proceeds of the policy might be considered a part of your estate and be subject to estate taxes when you die. Those estate taxes may be delayed if your spouse is the beneficiary, but taxes may be due when he or she passes away.

Also, remember that while you can state in your will that the proceeds of a life insurance policy should go to one of your beneficiaries, only the named beneficiary of the policy gets the funds. When your intentions change, you must contact the life insurance company to update your beneficiary designation. You should also update any 401(k)s or IRAs.

Talk with your estate planning lawyer to be certain that your life insurance policies work in concert with the rest of your estate plan to give your family protection and to help avoid unintended and potentially unpleasant financial consequences.

11/14/2016

“Over time, many people have wished that Social Security would become more user-friendly and quicker to provide its "customers" (you and me) with special services and work-arounds that respond to pressing needs or just make life a little easier.”

Some years ago, Social Security officials saw that the long waiting time for decisions on disability applications was resulting in severe hardship for the seriously ill. As a consequence, the agency established the Compassionate Allowances List.

This program’s goal is to swiftly grant disability status to those who suffer from any of the 225 serious medical conditions on the list. They include rare diseases, cancers, traumatic brain injury, stroke, early onset Alzheimer's disease and related dementias, schizophrenia, cardiovascular disease, multiple organ transplants and autoimmune diseases.

The Social Security Administration says that folks who can show they suffer from any of these afflictions will receive approval in weeks rather than months or years.

If you see that a loved one isn’t good at managing money, Social Security can help with its Representative Payee Program. It matches people who require assistance managing their finances with people who are willing and able to help them.

If you're concerned that a loved one has become incapable of managing or directing the management of his or her benefits, speak with an elder law attorney who focuses on Social Security to discuss your concerns.

Social Security will typically look to family members or friends to serve as representative payees. If no one is available, they work with social service agencies to locate people to serve as representative payees.

The payee takes control of the benefits sent to the person by Social Security, and the payee manages the money for the needs of that person. The payee has to maintain records and submit reports of his or her actions to Social Security.

Once your divorce is final—that is, the divorce decree has been approved by a judge—and a judgment rendered, you should begin to review and revise, if necessary, the following legal and estate planning documents:

Trusts

Powers of Attorney (property, healthcare, HIPAA, etc.)

Your will

Life insurance policies

Retirement accounts

Let’s say your ex-spouse is the beneficiary of your life insurance policy and you die.

Guess what!

The proceeds are going to go straight to your ex-spouse and not your children. It doesn’t matter if your estate planning documents stipulate that the proceeds should go to your children. Still, if the plan all along was to keep the ex as beneficiary, you’re fine. Otherwise, the kids get zero.

What happens if you don’t even have a valid will in place? The divorce cuts the ex-spouse out as a legal heir, and that person won’t be in line to receive anything from your estate—but they still get the insurance proceeds if you don’t make the beneficiary change.

One final thought: when you make changes to estate planning documents, be certain that the changes are in accordance with the terms of your divorce decree. The divorce judgment is legally binding, and if you agreed that your ex-spouse would remain the beneficiary of a life insurance policy as a part of your divorce, you can’t change the beneficiary designation on the policy.

If you do, you’ll create a significant headache for your heirs if you pass away while the policy is in force.

11/10/2016

Kiplinger’s recent article, “Tax-Smart Ways to Save When You're Too Old for a Traditional IRA,” reminds us that you are not allowed to contribute to a traditional IRA starting in the year you turn 70½. Nonetheless, you’re still able to contribute to a Roth IRA at any age. That money can grow tax-free in the account indefinitely, and you don’t have to take required minimum distributions (RMDs).

To qualify for a Roth IRA, your income in 2016 has to be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.

You can contribute up to the amount you earned for the year (your net income from self-employment) with a maximum of $6,500—that’s $5,500 for everyone under age 50, plus $1,000 for people age 50 and older. If your earnings are well over the $6,500 maximum, you can just contribute that amount. However, if your earnings are near or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution.

For that information, see IRS Publication 590, Individual Retirement Arrangements. It notes that starting in 2015, you can make just one rollover from an IRA to another (or the same) IRA in any one-year period—regardless of the number of IRAs you own.

You can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. In addition, you can also make as many rollovers from a traditional IRA to a Roth IRA (known as “conversions”).

And if you’re self-employed, you can contribute to a solo 401(k), deduct your contribution now and defer taxes on the money until it’s withdrawn. However, since you’re over age 70½, you are required to take required minimum distributions from the solo 401(k).

Employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½; however, that rule doesn’t apply if you own 5% or more of the company. So if you’re self-employed and own the whole company, you’ll be stuck taking the RMDs.

11/09/2016

“What’s the difference between a power of attorney and a durable power of attorney?”

Estate planning documents may not be the most exciting discussion, but understanding what you need to make sure your wishes are followed is essential for everyone, says NJ 101.5 in its recent post, “Understanding power of attorney documents.”

A power of attorney (POA) is a legal document that’s used to give a trusted friend or family member (known as the attorney-in-fact or agent) the authority to act on your behalf on financial or legal matters. You can specify the scope of powers, which can be very broad or limited.

You would typically use a POA if you need help with a single task, like requiring someone to represent you in a legal matter that you can’t attend to yourself. When that’s done, the agent’s powers automatically end. In addition, your agent can’t act on your behalf if you become incapacitated even though you’re not able to act for yourself.

Although there may be instances where this arrangement is preferred, a durable power of attorney (DPOA) is the right document to use when the agent’s powers need to endure while you are incapacitated. As an example, seniors might be concerned about their capacity diminishing over the years, so they designate a family member as agent in a DPOA to help them with day-to-day finances.

You can revoke a POA or DPOA at any time—provided you’re not incapacitated. If you are, the DPOA is still valid, and you no longer have capacity to revoke it. In all situations, your agent’s power stops upon your death.

A DPOA can give you and your family peace of mind that you have a trusted individual selected to handle your affairs in an emergency. This also saves time and the expense of a legal proceeding to get someone appointed to take care of your affairs.

Unless you specify otherwise, your agent’s powers are effective immediately upon execution of the document—although you are still able to manage your own affairs. In some circumstances, it is preferable for the agent’s powers to be predicated on a certain event, which is called a “springing” power of attorney. You might use a springing power if the agent is a non-spouse.

You can also name an agent for medical decisions, but this is usually done with a separate document in concert with a living will.

Seniors depend significantly on their retirement funds in retirement—as well as their Social Security and pensions. But rather than keeping a contingency fund of three months of savings, retired seniors should really try to save up even more for the likely event that they need personal or medical care down the road. While it's more difficult to save when you don't have a steady income every month, it is possible and important.

An emergency fund is a good idea at every stage of an adult's life, but why is it even more important in retirement? Once you’re retired, you’re typically living off of savings and fixed income from investments and Social Security—not a salary. And, as individuals age, their typical annual expenses for health care usually go up because the risk of disease or injury can be higher.

Do Baby Boomers need an emergency fund in addition to their retirement savings? While you don’t need to have an emergency fund in a separate bank account than your savings, depending on your own ability to budget, it could be a good idea. The recommended amount of money in an emergency fund is based on a person's current and projected cost of living, but a good rule of thumb is about six to 12 months of average living expenses—and the more the better.

What needs to go into creating and maintaining an emergency fund? Take a look your current insurance coverage—including life and health insurance—as well as your average monthly burn rate (or your total monthly cost of living). Next, list any dependents you’re currently assisting or may need to help in the future—like children, grandchildren or friends. Also consider your current health and any existing conditions, the anticipated increase in health insurance costs and the future costs of estate planning—as well as any senior services that may be required like assisted living, skilled nursing, home healthcare and hospice.

When should you use an IRA for those unforeseen emergency expenses in retirement? You should have a good idea of your liquid assets, outstanding debt and any equity you have in real estate or traded securities. IRAs and 401(k)s can be solid backups to emergency fund accounts, but they can take longer to liquidate, so the proceeds may not be readily available in an emergency. Don’t rely on them heavily for your emergency funds.